The first thing we look at is the interest rate. It seems to us that if it is low, the whole loan will be cheap, but in practice it is not always the case. That is why marketers of various loan companies and banks so willingly include “2% interest rate” or other slogans of this type on advertising materials, but they provide the rest of the information with a much smaller print. A much more accurate indicator of whether a given offer is profitable is the Actual Annual Interest Rate, abbreviated Laraw. In that case, what makes up the nominal interest rate per year and how does it differ from the Laraw? Why may a low nominal interest rate not guarantee a cheap loan?
The nominal interest rate is expressed as a percentage. It means the interest rate on which interest will be charged on our debt. The higher the interest rate, the greater the nominal interest we pay – this is quite obvious and understandable. For example, at a nominal interest rate of 10% on USD 100, nominal interest will be USD 10. However, it is worth knowing that the nominal interest rate consists of several different elements. The first and most important is the interbank base rate, i.e. 3M WIBOR. It should be emphasized that its amount is completely independent of the bank and it cannot increase or decrease it. On the other hand, the margin is the element of interest which depends entirely on the will of the bank. So if we think that the interest rate on a given loan offer is too high, we can always negotiate it – but only the part that consists of the margin. Therefore, it is always worth asking what margin has been set for us and whether it is possible to lower it, especially in the case of long-term loans such as mortgage loans.
The bank may offer us a lower margin in exchange for a more valuable loan collateral, for example the purchase of its insurance. In the case of mortgage loans, the margin, and thus the entire nominal interest rate , may depend on the amount of our own contribution. However, the nominal interest rate per annum does not only apply to loans. You can also meet something like the nominal interest rate on the deposit . However, this is not a percentage by which we can multiply our contribution and calculate how much we will earn on such a deposit. It does not include factors such as inflation or Belka’s tax. So if the bank wants to encourage us through a high interest rate on the deposit, it is worth reading the details of the offer, because it may not be as attractive as it might seem at first glance.
Unlike the nominal interest rate, the Laraw is a percentage that takes into account not only the interest rate itself, but also all commissions (for example for granting a loan), additional fees and other costs. Thanks to this, we are able to assess at a glance whether a given offer is really as profitable as it seems. The larger the Laraw, the greater the total cost of the loan or credit. On the other hand, if you pay only interest, you may later overpay significantly if you add other fees. So keep this in mind when considering the offers of various banks. Fortunately, both them and all other financial institutions have a statutory obligation to include in their offers a clearly marked amount of Laraw.
It is good to know what the nominal interest rate is and whether it is really worth suggesting it or assessing the attractiveness of a given offer. Contrary to appearances, it gives us much less information about the total cost of credit than we would expect. In addition, it is a good idea to make use of the information that part of the interest rate (specifically the margin) can be negotiated with the bank.